Investors valuation for assets liquidity and safety and the corporate-treasury yield spread
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Date
2012-11-16
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Abstract
The present study seeks to explain the non-default component of corporate-
U.S. Treasury yield spreads. This is done by assuming, along the lines of
Krishnamurthy and Vissing-Jorgensen (2012), that investors' valuation for
asset-specific liquidity and safety features is being priced. For that purpose
I modify a standard asset pricing model by allowing certain groups of assets
to directly contribute to utility. Empirical tests of the model's implications
con firm that view and show that changes in the supply of more liquid and safe
assets cause a stronger impact on corporate-Treasury yield spreads compared
to changes in the supply of less liquid and safe assets. Finding this systematic
pattern, points to the existence of a demand function for liquidity and safety
attributes. Further I provide evidence that liquidity and safety are priced
separately from commonly used controls for economic risk and default risk
factors as well as liquidity risk controls.
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Keywords
Asset Pricing, Corporate-Treasury Bond Yield Spread, Credit Risk, Liquidity and Safety adjusted CAPM, Liquidity Premium